Are The Billionaire Koch Brothers Economic Imbeciles? The Cato Institute Proposes a Test.

Gary North

Dec. 18, 2012

A senior fellow at the Cato Institute has written a remarkable article. It implies that the Koch brothers, who are the main source of funding for Cato, are a pair of economic ignoramuses. (Note: "ignorami" is acceptable, if you're a pedant.) It was published in the Wall Street Journal's December 14 online edition and in a special insert in the December 17 printed edition.

His argumentation is nothing if not unique. Let me take you through it.

For all the praise it gets, there's just no evidence that the tax break leads people to increase their giving--but it does lead them to make bad choices about giving. What's more, it favors a segment of the public, the very wealthy, that can afford to give without a break. And cutting the deduction does a lot less economic harm than other ways of raising tax revenue.

Dr. Mitchell is a great believer in evidence. As we shall see, he cares not a fig for economic theory. Evidence is king.

Why do I say that he cares nothing for economic theory? Because he denies the fundamental premise of all free market economic theory: "At a higher price, less is demanded."
He says that charitable giving remains at 2% of gross income, no matter what the policy. This is his evidence.

He relies on the undefined concept of "need." This word is not used by free market economists. This is because they see behavior as modified at the margin. There are wants. Besides the basics of life, there are no needs.

Upper-income households are the biggest beneficiaries of the deduction, with those making more than $100,000 per year taking 81% of the deduction even though they account for just 13.5% of all U.S. tax returns.

The data are even more skewed for households with more than $200,000 of income. They account for fewer than 3% of all tax returns, yet they take 55% of all charitable deductions.

His argument is clear: marginal tax rates have no effect on giving. None.

Let's think about this claim. At a top bracket rate of 36%, for every dollar donated, Uncle Sam leaves 36 cents on the table. Mitchell says that it will not affect giving by adding 36% to the cost of giving by the rich.

In short, all modern economic theory is wrong. At 36% more costly, the same amount of charitable giving will occur.

Put differently, price is irrelevant to the rich. He is quite open about this.

These are people who can not only afford to give up the tax break, they would very likely give to charity without the deduction. They would still face tremendous cultural pressure to write charitable checks, as well as the prompting of their own conscience. Besides, many of them would still get nice perks for doing good--like seats at the opera or buildings named after them.

To understand the logic of this argument, I offer this annual fund-raising letter from Cato to the Koch Brothers.

David and Charles Koch
Somewhere, USA

Dear David and Charles:

Enclosed is a copy of a recent article by one of our fellows. It argues that rich people are economic ignoramuses. They do not respond to price changes. It states emphatically that if you and your peers have the tax deduction removed, you will still give as much money as before.

So, if the deduction is removed, as Dr. Mitchell recommends, we here at Cato expect that you will still send us as much money as you did before the deduction was removed.

Actually, we will need a bit more. Donors who are not fat cats like you will probably cut back on their giving. They respond to price changes. But you two won't. Dr. Mitchell has the evidence. You don't want to argue with evidence. That's what scientific economics is all about. We here at Cato are nothing if not scientific.

Just to show that we are confident that you will still send as much money as before, we are tossing in some opera tickets.